The Achilles Heel of Putin’s Regime

Russia’s crony capitalism is weaker than it seems. In fact, President Vladimir Putin’s consolidation of power has created a major potential threat to his authority, because the lack of credible property rights forces senior Russian officials and oligarchs to hold their money abroad.

WASHINGTON, DC – Russian President Vladimir Putin’s authority is weaker than it seems. In fact, the bedrock of Putin’s power – the clientelist economic arrangements that he has assiduously consolidated over the past generation – has become the main threat to his political survival. The reason is simple: the lack of credible property rights under Putin’s system of crony capitalism forces senior Russian officials and oligarchs to hold their money abroad, largely within the jurisdictions of the Western governments against which Putin rails.

With the help of carefully selected loyalists, Putin has established three circles of power: the state, state-owned corporations, and loyalists’ “private” companies. The process began during his tenure as chairman of the Federal Security Service, from 1998 to 1999, when he wielded control over the secret police.

But it was Putin’s first term as president, from 2000 to 2004, that amounts to a true masterpiece of power consolidation by a budding authoritarian. First, in the summer of 2000, he took charge of Russian television. Next, he established his “vertical of power” over the state administration and the regional administrations, as well as his “dictatorship of law” over the judicial system. And then, in the 2003 parliamentary election, Putin gained solid control over both the State Duma (the lower house) and the Federation Council (the upper house) of the Russian legislature. At the pinnacle of state power, the Security Council, he installed three KGB generals: Sergei Ivanov, Nikolai Patrushev, and Aleksandr Bortnikov.

Love the comments: I can be convinced (for example) that Singapore is doing well and will continue doing well, with a somewhat authoritarian form of government. I don't think there's any hope that Russia and Putin can match that. Not even close.

If Russia is doing well it is probably ONLY because of the "stability" that Putin is imposing from above, not because of any brilliance as a ruler or manager, or of good intentions. Comparing Russia economically to Germany or the USA is just an exercise in public humiliation for Putin and Russia. Germany is a tiny homogeneous country relative to Russia, and the USA is closer in size, but both are advanced industrial countries. Is Russia in that league? No, and it will not be, never, at its current rate. Can its people have good or pleasant lives without that? Yes, they can. Are the Russian plutocrats and oligarchs thieves of the highest and most pernicious order? Yes they are. Does it matter and create a weakness for Russia? Yes it does. Because a significant part of the created wealth of the country is being extracted and invested in, for example, the USA and UK, and the rest of the world, and not in Russia. Sort of sad and unfortunate for the Russians.

Do I care? Not much. Should anyone care? I think the Russian people should care, but assume they truly think Putin is wonderful? Years from now maybe it will unravel, but Putin is safe for now. The USA and the West can and should do better. After all, we have their money in our banks.

Given current trends, Russia has real issues. It is tied to extractive industries which are controlled by a plutocracy. There is also little incentive to engage in creative destruction (a la Schumpeter). America has to be patient to wait out the current Russian oligarchy which will slowly self destruct. Sooner or later (said with sadness) there will be a major internal crisis in Russia and the people will become disenchanted.

Of course, Russia is doing far better than the globalist cosmopolitan elite would like. Putin appears to be second most popular leader (in his own country) in the world. Sure PS hates him. So what? The people of Russia like him. Why? He is a pro-Russian nationalist. Nationalism is a dirty world in PS circles. The people of Russia don't see it that way.

This article is actually a weird mixture of important facts and nonsense.

The GDP statistics (Russia vs. Germany) were fake news at (almost) its worst. Numerous sources put the GDP of Russia and Germany as almost equal. Using “exchange rate” metrics is so phony that almost no one is likely to be fooled. Of course, there are some folks who use the same methodology to claim that the U.S. economy is larger than China’s…

From some prior comments of mine...

The life expectancy data is real, but deeply misleading. Life expectancy crashed after the end of Communism (by five years). Since Putin took power Russian life-expectancy has risen by five years and is now at an all-time high (using the World Bank data via Google). Measured solely in terms of life-expectancy, Putin has been a great success for Russia. By contrast, life-expectancy is now falling for many groups of Americans. Neoliberalism is failing in the U.S. (just as it is failing in many other places as well).

Per-capita GDP (in constant currency) has risen markedly under Putin. The low point was 1998 at $11,918. By 2000, per-capita GDP had risen to $14,051. In 2014, per-capita GDP was $24,874. 2014 is the last year available in the Google data. The IMF WEO data goes out to 2021 (projections of course). The IMF WEO data shows that per-capita GDP grew from 244,437 in 2000 to 422,999 in 2015 (data after 2015 are projections). That’s a gain of 73% over 15 years.

Let’s use a simple comparison. In 2000, Russia’s per-capita GDP was 37.8% of Germany’s. In 2015, Russia’s per-capita GDP was 55.28% of Germany’s. Note that this ratio peaked in 2013 at 57.81% and has declined since then.

For the record, Stiglitz’s critiques of the Washington Consensus are valid (in my opinion). The role of Washington, Harvard, Summers, and Shleifer was, and remains, deeply disgraceful. Russian bitterness over this fiascos was justified then and still is.

However, Stiglitz is simply wrong in his criticisms of Putin’s performance in office. The numbers just don’t support the argument. Of course, China and Vietnam have even better numbers over the period in question. However, they are even less democratic and more authoritarian.

"Russia: so weak... yet so powerful", exclaimed a European statesman, generations ago. Never truly understood by the West, she also never experienced a Renaissance or Illustration, but instead got an extended Absolutism, and then a Communist state. And then Putin. Historically, badly mauled in war by a succession of disasters: Napoleon in 1812, Japan in 1905, then the Germans in 1917 and in 1941. She surprisingly recovered in each case and came out as unexpected victor, doing the heavy lifting in the job of dispatching the material armies of aspiring European hegemons. The same job she did with the Japanese Imperial Army, in China, in 1945.
Of course pundits around amuse themselves knitting derogatory theories explaining Russia's soring demise. I imagine that 's is part of the trick.

It would be nice to read things about Russia that are not such obvious propaganda. I would like to know more about Russia than I do - to understand why the Putin government remains so popular, for instance, or what people in the Crimea now think about the takeover. I am sure that Russia is far from perfect, but I am also sure that much of what I see in the western media, including this piece, is severely biased.

I have a simple proposal. Let's let the people of Crimea vote about what country they would prefer to belong to. Actually, they already did. The vote overwhelmingly favored leaving the Ukraine and joining Russia.

You reveal much about yourself and the paucity of objective analysis, in this comment.
-96.77% voted in favour of joining Russia. Ever seen a referendum with those results, that wasn't rigged?
- OSCE observers attempted to enter the region but turned away after being shot at
- former Putin advisor Andrey Illarionov showed prior polls indicating 23-41% support for joining Russia. He called the referendum "grossly rigged falsification"

and on and on.

A fair a free referendum would most likely have produced a majority in favour of joining Russia, based on post referendum polls by reputable organisations. But, Russia doesn't leave things to chance, where elections and referendums are concerned.

Anders Åslund points out the "three circles of power" - the state, state-owned corporations, and loyalists’ “private” companies - Vladimir Putin has created since he came to power in 2000. While he has control over every single one of them, as they are based in Russia, he can't control the fourth one, because it involves "offshore tax havens themselves." Most remarkably the majority of ill-gotten wealth that well-heeled Russians tuck away is being managed by shell companies in the UK and the US.
Putin had consolidated power the first four years of his office - taking control of the Russian television and the entire state with its "vertical of power" that centralises all administrations. He embodies the executive power and oversees the legislative and the judicative branches . Then he installed three former KGB generals: Sergei Ivanov as chief of staff; Nikolai Patrushev, secretary of the security council; and Alexander Bortnikov, director of the FSB, the successor to the KGB.
Putin had been accused of bankrupting Yukos oil company, seizing its assets and putting its boss, Russia's then richest man, Mikhail Khodorkovsky behind bars. Other oligarchs eneded up as fugitives living in exile abroad. After having seized "control over the state corporations one by one, beginning with Gazprom in May 2001," Putin appointed cronies to run the state-owned companies - Igor Sechin of Rosneft, Aleksei Miller of Gazprom, and Sergei Chemezov of Rostec.
The circle of Putin's loyalists makes up of people he knew from his home town, St. Petersberg or from his earlier days as KGB officer. The "top four" - Gennady Timchenko, Arkady Rotenberg, Yuri Kovalchuk, and Nikolai Shamalov - are all billionaires. Shamalov, whose father is a friend of Putin, is said to be married to Russia's first daughter. These people and their businesses enjoy all thinkable privileges that are unknown to outsiders.
As Putin relies heavily on loyalty, many of his cronies lack the merits to run large corporations or the business acumen to be successful. But they become wealthy and powerful thanks to their ties to Putin. This malaise fuels resentment among the young and talented, who are ambitious but see little career prospect due to favouritism. What Putin has overseen, is that "in the absence of credible property rights, wealthy Russians, including /his/ own cronies." know that their assets are safer abroad, mostly "within the jurisdictions of the Western governments against which Putin rails."
Of all offshore safe havens, the UK and the US seem to have been the destinations of capital flight from Russia. The author sees it as the "fourth" circle of power Putin can't control. The US state of Delaware is known for the many law firms and financial services that are involved in money laundering by hiding their clients' identities behind shell companies. One of the Russians Donald Trump Jr met in June 2016 at Trump Tower is known to have set up thousands of fake accounts in Delaware on behalf of shady Russians.
The author says "the assets of Putin’s cronies in the US and the European Union are supposed to be frozen" followings sanctions imposed on Russia after the 2014 annexation of Crimea. Apparently hardly any account had been found. He calls for action "by initiating comprehensive investigations into the assets of sanctioned people." Unlike European countries that prohibit "the anonymity of beneficiary owners," the US and the UK are said to "hold the vast majority of Russian offshore wealth," because lawyers have been allowed to "transfer anonymous or dirty money" on their clients' behalf.
On August 2 Trump signed - reluctantly - a new bill that imposes a new round of sanctions on Russia and limits his ability to remove them. It also includes "far-reaching investigations into 'senior foreign political figures and oligarchs in the Russian Federation' - including 'spouses, children, parents, and siblings' – and their assets within 180 days."
The author cites the veteran liberal Russian politician Leonid Gozman, who said: "the Russian state is very valuable.” Yet it is also “a very fragile construct that can be destroyed by anything” such as the eradication of corruption and the purge of kleptocrats. "Given the vast stocks of Russian capital that have piled up in New York, London, and elsewhere, the West is ideally positioned to exploit this fragility."

Weak property rights and capital flight are both very good things for a despot. Sanctions and low oil prices have strengthened Putin. There may be an element of fragility to financial markets in the U.K and the U.S which militates against cracking down on kleptocrats parking their cash in those countries. No such fragility exists for Russia's own economic system. On the contrary, smart young people- of the sort who might object to Putin's grotesque regime- will be pushed out while primary production suffices for basic 'bread and circuses' to keep the proles stupefied.

The UK is the favorite for a variety of legal and cultural reasons. And, the UK is secretly quite proud of 'billionaire's row' and obscene property values at the high-end. The UK is also the inventor of tax havens on the Channel Islands and elsewhere. But, many continental European countries, and the US, are only gradually 'better' with rejecting flight capital. Since all this is not likely to change anytime soon, Putin is quite safe.

I expect Putin to be around for some time. He appears very successful in his environment.

Western regulators are massively outnumbered by private avoidance effort and the model is self regulation and external audit. Anybody who has witnessed this model in action will know it has problems. The Credit Crunch was after all the fruit of that model

New Comment

Pin comment to this paragraph

After posting your comment, you’ll have a ten-minute window to make any edits. Please note that we moderate comments to ensure the conversation remains topically relevant. We appreciate well-informed comments and welcome your criticism and insight. Please be civil and avoid name-calling and ad hominem remarks.

Log in/Register

Please log in or register to continue. Registration is free and requires only your email address.

Log in

Register

Emailrequired

PasswordrequiredRemember me?

Please enter your email address and click on the reset-password button. If your email exists in our system, we'll send you an email with a link to reset your password. Please note that the link will expire twenty-four hours after the email is sent. If you can't find this email, please check your spam folder.